Ways to lower your taxes
Income taxes can be taxing. And that’s especially the case with the tax overhaul signed into law late last year.
The law created $1.5 trillion in tax cuts but did nothing to make the filing process simpler. In fact, the “Tax Cuts and Jobs Act” fell woefully short in that regard, according to Wolters Kluwer, an information services and software company.
Given all that, now would be a good time to review ways to cut your tax bill before it gets too late in the year. After all, you likely don’t want to pay any more in income taxes than the new law demands.
What do experts recommend?
Check your withholding
Check your withholding and update your W-4 if needed, says Julie Welch, a partner in the accounting firm Meara Welch Browne in Leawood, Kansas. “If additional withholding is needed before year-end, you can use line 6 of the W-4 to state the amount,” she says. “Remember to submit another updated W-4 if you wish to remove that extra withholding in the future,” she adds.
Use it or lose it
Robert Westley, a vice president and wealth adviser at Northern Trust Company in New York, says taxpayers should focus on the use-it or-lose-it type planning opportunities.
“Taxpayers should strive to maximize contributions to their available retirement plans, keeping in mind the additional contributions that may be made if age 50 or older,” he says.
Taxpayers should review their flexible spending accounts or FSAs and plan how to use the funds before year-end. “Any funds not used by the end of the year or account deadline will be lost,” says Westley.
Bunch charitable contributions
The new tax law doubled the standard deduction to $12,000 for single taxpayers and $24,000 for those married filing jointly. And that, combined with changes that limit or repeal many itemized deductions, means that starting in 2018 more than 90 percent of taxpayers will claim the standard deduction, according to the firm Wolters Kluwer.
For those individuals who are considering the standard deduction instead of itemizing, consider bunching your charitable contributions into alternate years if it will enable you to take the standard deduction one year and itemize the next.
“If you do not want to give the money to charity at one time, contribute to a donor-advised fund and then make the distributions to charity over time,” says Lisa Featherngill, the head of legacy and wealth planning at Abbot Downing in Winston-Salem, North Carolina.
Gift your money
Year-end is also a great time to make annual exclusion gifts, says Westley. “For those looking to reduce their estate tax exposure, individuals can give up to $15,000 to an unlimited number of beneficiaries per year without decreasing their lifetime estate tax exclusion amount or paying a gift tax,” he says. “These (and other) planning opportunities will be lost once the year ends and should be top of mind to review now.”
Got qualified business income?
The new 20 percent deduction from qualified business income for pass-through entities is a significant potential tax benefit for business owners, says Mark Luscombe, a principal analyst with Wolters Kluwer. “But it can be complicated to figure out how to maximize the deduction,” he says.
Luscombe’s advice: Work with a trusted tax adviser to maximize eligibility for the 20 percent deduction.
Tactics based on your bracket
Leonard Wright, a wealth management adviser at Northwestern Mutual, says there are specific steps to take based on your tax rate.
“If your tax rate is high, consider boosting your and your spouse’s 401(k) contributions and/or your spouse’s IRA contributions,” he says. “but if you are in a loss position, or a very low tax bracket, consider converting IRA or 401(k) assets to a Roth IRA.”
Also, consider contributing to a Roth 401(k) or Roth IRA if able. “Especially for anyone who is early on in their career and in a lower tax bracket,” Wright says.